Claire McAdams - Investor Relations Counsel Wendell Blonigan - President and Chief Executive Officer James Moniz - Chief Financial Officer.

Nehal Chokshi - Maxim Group Peter Peng - B. Riley FBR, Inc. Ben Klieve - Noble Capital Markets Mark Miller - Benchmark Co..

Good day and welcome to Intevac's Fourth Quarter and Full-Year 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will follow at that time.

[Operator Instructions] Please note that this conference call is being recorded today, January 31, 2018. At this time, I would like to turn the call over to Claire McAdams, Intevac's Investor Relations Counsel. Please go ahead..

Thank you, and good afternoon, everyone. Thank you for joining us today to discuss Intevac's financial results for the fourth quarter and full-year 2017, which ended on December 30. In addition to discussing the Company's recent results, we will provide financial guidance for the first quarter 2018 and our preliminary outlook for the full-year.

Joining me on today's call are Wendell Blonigan, President and Chief Executive Officer; and Jim Moniz, Chief Financial Officer. Wendell will start with a review of each our businesses and our outlook going forward then Jim will review fourth quarter results and discuss our financial outlook before turning the call over to Q&A.

I'd like to remind everyone that today's conference call contain certain forward-looking statements including, but not limited to statements regarding financial results for the Company's most recently completed fiscal quarter and year, which remains subject to adjustment in connection with the preparation of our Form 10-Q, as well as comments regarding future events and projections about the future financial performance of Intevac.

These forward-looking statements are based upon our current expectations and actual results could differ materially as a result of various risks and uncertainties relating to these comments and other risk factors discussed in documents filed by us with the Securities and Exchange Commission, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

The contents of this January 31 call include time-sensitive forward-looking statements that represent our projections as of today. We undertake no obligation to update the forward-looking statements made during this conference call. I will now turn the call over to Wendell..

Thanks, Claire, and good afternoon. Today, we reported Q4 results favorable to guidance with revenues of $24.8 million and breakeven profitability. The continued technology investments by our HDD customers and upside in upgrades help drive revenues to the high-end of the range and drove better than forecasted gross margin and bottom line results.

For the full-year our results were consistent with the strong growth and profitability objectives set at this time last year. We return to profitability and exceeded our earnings guidance.

2017 was another pivotal year for Intevac and which we continue to execute our strategy to grow our Thin-film Equipment business with substrate independent thin-film processing platforms serving multiple large markets. Summarizing the highlights for the year. This was our third straight year of growth in both revenues and orders.

New orders were $108 million up 11% from 2016, revenues were up 41% from 2016 driven by strong growth in both our core HDD market as well as our new Thin-film Equipment growth initiatives. For the Thin-film Equipment business in particular revenues were up 75% year-over-year.

We recognize revenue on every product platform during the year the 200 Lean, the VERTEX, the MATRIX, and the ENERGi. Year in backlog for this business increased for the fifth straight year to $52 million dollars.

In our Photonics business new orders were driven primarily by the booking of funds for the development of our next generation night vision sensor the ISIE-19, which will be the core technology in most long-term programs we are engaged with now or are pursuing and will drive our product base revenues in the future.

2017 was our third straight year of improving operating results, achieving our milestone and return to profitability without relying on capacity additions in the hard drive disk market as we delivered an EPS of 18% per diluted share for the fiscal year.

Each of these highlighted accomplishments sets the stage for the continued positive momentum of the Company which we have been relentlessly building over the last several years. Now for an update on each of our businesses starting with Thin-film Equipment.

A big part of our growth stories are VERTEX project and our progress deploying our protective coatings into the display cover panel market. The VERTEX deposits Optical Grade Diamond-Like Carbon or oDLC as a protective coating for display cover panels.

We believe the largest driver of significant revenue growth potential over the next few years continues to be for the VERTEX. In 2017, we recognized revenue on four VERTEX tools.

Three of which are in production and Truly Opto-electronics, and one which is being used for coating multiple applications of oDLC for performance evaluations and testing at a second Tier 1 customer.

A key driver of the increased oDLC sampling and demos during 2017 has been a growing interest in integrating oDLC as a protective coating with other film stacks. The integration of oDLC with other films is now a significant driver of current customer evaluations and qualification activity.

Over the last couple of years, we have seen Samsung and now Apple transition to glass back cover panels primarily to enable wireless charging. This transition is clearly been driving increased interest in oDLC by multiple companies as many cell phone makers follow these industry leaders.

We saw a surge of interest in the back half of 2017 on the back cover glass application. We are pleased to report that a top five cell phone maker has selected our oDLC coating to protect the decorative film stack on the back cover glass for a new phone that would be released in the coming months.

The capability to deposit oDLC on back cover glass was a key factor in truing winning disorder. This is a major milestone for the progression of our VERTEX business with production just starting to ramp now.

While it's not our place to make announcements for phone makers, we are very excited about providing value and differentiation that should very soon be visible in the cell phone marketplace. Recent launches of phones that incorporate glass back covers have decorative coatings or laminates on the inside of the cover glass.

Coating on the inside, it requires you to view the color effect through the glass and is subject to the reflections we all see in sunlight, making it difficult to see what is behind the glass.

We have been working on protection of decorative films that are on the outside of the back cover glass, which makes the color exceptionally more vibrant in striking. These coatings require scratch and wear protection in our oDLC deposited by the VERTEX is the solution.

At this point, we believe this initial launch will ramp gradually in the first quarter of the year and occupy a significant installed capacity.

We anticipate as the end product gets to market these highly vibrant back covers will proliferate to do additional models and handset makers and look forward to keeping you up to date on the success of this exciting new application.

Our second customer continues to move deliberately through evaluation process for oDLC for multiple uses, including months' worth of user field testing for an initial application.

This extensive evaluation and qualification process in which we are engaged albeit taking longer than we initially anticipated has been an incredibly important step for us, as we are learning what matters most in film performance for each application, developing performance metrics, testing methodologies, and multi-film integration requirements.

It has also given us a clearer picture of the differences in requirements and introduction processes between competing handset makers. Given the accumulated knowledge and effort between us and our customer, we continue to work together towards the initial adoption of our solution on a launch application.

Over the last several quarters in our labs in Santa Clara. We've been working on the next-generation of oDLC. To ensure we maintain our technology leadership position and add functionality that is being requested for different applications across the industry. In support of our efforts to maintain our leadership position, we've been granted U.S.

patent for oDLC deposition source and have developed new source technology in support of our newest oDLC film stack, we call oDLC 2.0. This new source technology is not only applicable with oDLC and oDLC 2.0. It also will provide a solution on VERTEX to deposit antireflective and decorative coatings for the display cover panel market in the future.

We have been focusing on depositing ultra-hard films that when protected with our oDLC can move to scratch resistance of glass closer to industrial sapphire, in what's called the most hardness test.

In our lab, we've demonstrated the ability to deposit thin-film oDLC under layers that pass the most seven hard disk test, and when protected by oDLC retain all the mechanical functionality of the original oDLC film. Cover glass typically scratches at Mohs 5, industrial sapphire scratches at Mohs 8, similar to our new films.

We have just begun initial discussions regarding oDLC 2.0 with our customers and plan to have the new technology productized and available for new VERTEX shipments and upgrades for the installed base in the back half of the year.

We have one VERTEX in finished goods inventory and long lead material for several additional systems, which will allow us to quickly response in new orders. And as we've said previously, these orders could come from either existing or a new customer. While the timing of a major revenue inflection point for the VERTEX is difficult to predict.

This year our objective is to see a positive response to our first phone application for a top five handset maker and grow orders revenue and backlog and a VERTEX over 2017 levels.

At this point, early in the year, our expectation is that we will book five to 10 VERTEX tools in 2018, but with the opportunity for upside to that range depending on the traction we get with our initial launch on the top five handset makers phone. We'll update you on that range as we progress through the year.

In the hard drive market, the program is to upgrade the technical capabilities of our customers installed base continues. We have booked 13, 200 leans over the last six quarters. Four shipped in 2016. Six in 2017 and three tools are currently in backlog for 2018 revenue.

We have also witnessed increasing strength and upgrades to our customers installed base of 200 leans primarily to add additional processing chambers and upgrade to our newest technologies.

We have said these are ongoing technology upgrade programs, which we see continuing into the foreseeable future providing us with a solid base business in our core HDD market. The fourth quarter was another period of upside relative to expectations and both PC and hard drive unit.

We don't have final numbers on exabyte growth or media units, but it's possible 2017 saw the strongest uptick in exabytes shipped on hard drives in several years.

The growth segment in the HDD market continues to be in high capacity near line drives, which is positive for our business given significant numbers of disks in each near line drive the industry. The industry tie ratio or average number of disks per drive has been growing over 10% a year to record 2.2 disks per drive last year.

If the tie ratio continues to increase this rate, demand will exceed the installed media capacity in around two years in a flat HDD unit environment.

In the meantime, the technology upgrade great program is underway both the new 200 leans in multiple tool upgrades in the field continues and has contributed to strong growth in our hard drive business over the last two years and is expected to drive another strong year for this business in 2018.

Now for an update on our activity with solar equipment, our backlog currently includes 12 ENERGi implant systems for high-efficiency solar cells manufacturing.

Our purchase contract call for our customer to take delivery of all 12 tools before the end of last year, delays in their factory builds has resulted in them delaying the delivery schedule for the systems. We ship the first three systems in the third quarter and are working with our customer to determine delivery timing on the remaining nine.

As a result of our recent negotiations a little over a week ago, we now expect the first three tools we shipped will begin installation at the end of Q1 with three more shipping in the year and the remaining six shipping in the first half of 2019.

Given the expected installation timing and depended upon the acceptance duration it looks like the first six tools should revenue this year with the first two requiring sign off and the rest will revenue and shipment. Once we have finalized our negotiations we could be more specific on the timing.

Certainly going into this conference call the expectation was all $22 million of ENERGi backlog would revenue in 2018. As we stand today about half of that backlog will revenue in 2019 and this delay accounts for about $11 million with the revenue moving out of the year. The major platform we initially sold in to solar applications is the MATRIX.

While the VERTEX is a substrate independent vertical carrier based platform, the MATRIX is a horizontal carrier base platform suitable for multiple end market applications. In the solar market we expect MATRIX opportunities to consist of factory upgrades over the next few years as are minimal end type capacity build outs expected in the near-term.

We are actively in discussions with the current customer on the opportunities that exist. Two weeks ago we took the opportunity at the Needham Growth conference to announce both via press release and IR presentation. Our efforts in emerging application for our MATRIX in advanced wafer level and panel level packaging.

Last week we were informed that our presentation at the IWLPC Conference late last year was voted best advanced manufacturing and test track paper. A press release from the conference panel and our presentation will be available on our website shortly.

This is a new market where our advantages of high productivity thin-film processing solutions provide a compelling advantage over current solutions. In particular, our solution reduces the cost of the redistribution seen layer by two-thirds compared to existing process technology.

The MATRIX presents a cost reduction past of the industry OSATs as they move from wafer to panel level processing as the same MATRIX platform can be configured for today's 300 millimeter wavers or panels up to 890 millimeters wide.

Consistent with our product development process we are currently engaged with Tier-1 OSATs and have ongoing activity for both wafer level and panel level demonstrations and evaluations. We've participated in a number of industry conferences and completed the majority of the development work on process modules for this system during 2017.

I look forward to updating on our progress addressing this new market from Intevac over the coming quarters. At this point, we don't expect to revenue any MATRIX systems for this market this year but our objective is to book and ship the first tool to a Tier-1 foundation OSAT customers before the end of the year. Now living on to Photonics.

As we look back on 2017, I'd like to congratulate the Photonics team for their outstanding results in the design build and deployment of the EI squared Apache camera. Into that completed the initial deployment of 1,194 cameras to the U.S. Army in foreign military partners in the fourth quarter of last year.

Is an outstanding honor to be the night vision technology of choice for the leading edge fighting platforms of the U.S. Military. We had Intevac great pride and delivering leading edge technology to our HARM services and providing them differentiated advantage against our enemies.

We also look forward to the continuing projects we are working on with program Apache. Including the current rollout of the next generation of firmware to the Apache fleet. The addition of a second camera into the Apache for the weapons officer and the upgrade of the current installed base of cameras with the ISIE-19 sensor currently in development.

A second camera on the Apache would bring about a new wave of significant product revenues for this program. Similar in scope to the initial Apache deployment. Our production programs for the F-35 Joint Strike Fighter camera continues to run steady volume and we delivered our 1,200 camera module in Q4.

Also in Q4 we received our next production order on the JSF a program that runs through October of this year, follow-on orders are expected as we move through 2018 to extend uninterrupted production through 2019.

As we move into 2018, our Photonics division is heads down and needs deep in multiple development programs that was successfully booked in 2017. All of which position is to capture significant portions of our revenue opportunity pipeline of over $1.4 billion of programs we are engaged with and are pursuing, including dismounted soldier opportunities.

We are well underway with the funded development of our ISIE-19 sensors which will be the key component for our future as most of our new programs will use this sensor as the core technology and will be the upgrade path for installed base of ISIE-11 our current sensor. First Silicon is now in-house and we are in the testing and packaging stages.

Our target is to have our first ISIE-19 prototype sensor operational by year end. We are in funded development for the camera module for BAE Striker II Helmet system which is planned to deploy on the Typhoon Eurofighter. In 2018, Intevac is back into the binocular applications with our last binocular program having ended in 2014.

Development of the binocular for the Australian Army is nearing completion and will be currently procuring the initial prototypes for test and evaluation. We anticipate first light through these prototypes in Q1. We are also the prime for the DELTA-I Coalition Warfare program gaggle.

This program will deliver 24 fuse night vision goggles to the four nations and six entities funding the development for evaluation by operators in the field. This binocular night vision goggles will incorporate two of our next generation EBAPS sensors, the ISIE-19 and a high-definition long wave infrared sensor to provide a fused digital image.

The award of the DELTA-I contract is expected during the second quarter of 2018. We are also being funded for additional night vision projects that are classified and we cannot discuss. Finally, we delivered our first prototypes for the Family of Weapon Sites, Crew Served Program in December.

Our content in this program is the wireless head-mounted display that mounts to the helmet and wirelessly connects to the soldier's weapon. Included in the HMD is our proprietary see-through freeform prism. This display system is also used on the M2 Weapon Sights program that we have also been selected to deliver.

With all the new development programs we just talked about and the completion of the initial phase of the Apache program, our photonics revenue profile is now moving from a product driven one to a funded R&D revenue profile. This has a couple of implications.

First, the margin profile business will be trending lower as fees on funded development contracts are capped by the government which is also been pushing suppliers for cost share on some programs.

Secondly, while production programs such as our current Joint Strike Fighter contract tend to be reasonably predictable and steady, development programs, however different. They can be subject to the politics of Washington. Currently, we are in continuing resolution as the budget is not yet approved.

New starts are on hold and existing money is being moved around. Given the current climate inside the Beltway, we will need to follow our programs in place and bookings forecast carefully.

Our objective is to deliver similar revenue levels in 2018 compared with 2017, but we need to remain diligent for possible changes driven by political gridlock or budget shortfalls.

So in summary, for the Company overall, we are excited about a significant opportunities ahead of us in 2018 and our efforts in our equipment growth initiatives put us on a path for continued revenue growth and increased profitability.

In Thin-film Equipment, we expect to see another strong year for our hard drive business with similar revenues as 2017 and increased revenues in our equipment growth markets. This year-over-year revenue growth would consist of increased revenue on our VERTEX product and revenue recognition for half of the backlog of our ENERGi product.

Quarterly revenue this year will be lumpy as usual and backend loaded similar to the profile in 2016, but opposite of 2017 with the first quarter revenues being lowest and the fourth quarter projected to be the highest. Driving this backend loaded profile are several factors.

First, as I discussed earlier, our ENERGi Implant tool installations for solar and the required two signoffs for revenue recognition have pushed out now around five months, most likely into late Q2 or early Q3 depending on overall factory readiness.

Second, there's a likelihood that some of the current forecasted VERTEX systems could be a new configuration with new source technology that would require a field signoff prior to revenue recognition.

And third, we are seeing lead times for a key vacuum component on our 200 Leans and process models extend to the overall capital equipment coming in demand from the industry. Given all that we've discussed in the exciting opportunities in front of us we expect to grow revenues by at least 10% this year and continue to drive profitable operations.

As with years previous there are a lot of moving pieces. And we'll continue to update you on our annual forecast as things develop throughout the year. I will now turn the call over to Jim to discuss our Q4 and full-year 2017 results, our Q1 forecast and some additional commentary on 2018.

Jim?.

Thank you, Wendell. First I'll reiterate a few highlights about our full-year financial performance. Revenue increased 41% to $112.8 million. While Photonics revenues were similar to 2016 we saw significant growth in Thin-film Equipment with revenue up 75% year-over-year. Total gross profit was up by 50%, while R&D and SG&A expenses were up only 8%.

We return to profitability in 2017 for the first time since 2010 and recorded EPS of $0.18 per share. Total orders were up for the third straight year increasing 11% to over $108 million. We ended the year with cash in investments including restricted cash of $43.5 million. Now turning to the fourth quarter results.

Consolidated fourth quarter revenues totaled $24.8 million. This was at the high-end of our guidance of $24 million to $25 million. Thin-film Equipment revenue totaled $17.9 million and included to two 200 Leans along with upgrades, spares and service.

Photonics revenue of $6.9 million included $4.2 million of product revenues and $2.7 million contract research and development revenues. Q4 consolidated gross margin was 39.8% above guidance due to a more favorable mix of business in Thin-film Equipment.

Thin-film Equipment gross margin was 45%, up from the fourth quarter of last year and down slightly from the third quarter of this year. Photonics gross margin was 26% lower than last quarter and the fourth quarter of last year.

The decline was primarily driven by lower margins on products and a higher mix of lower margin research and development contracts. Q4 R&D and SG&A expenses was $9.7 million lower than Q3 and below our guidance due to timing of engineering material purchases.

The Q4 net loss was $41,000 basically breakeven better than our guidance driven by better gross profit from that Thin-film Equipment business and lower than forecast operating expenses. Our backlog was $64 million at year-end. Thin-film Equipment backlog of $51.7 million included three 200 Lean HDD systems and twelve ENERGi solar ion implant systems.

Three ENERGi tools were delivered our customer's factories by year-end, but our pending installation. The backlog in our Photonics business was $12.3 million. We ended the year with cash in investments including restricted cash of $43.5 million, equivalent to approximately $1.99 per share based on 21.8 million shares at year-end.

Cash flow used by operations was $639,000 during the quarter and $2.4 million for the year. Q4 capital expenditures were $803,000 and depreciation and amortization were $994,000 for the quarter. Now let me turn to the full-year outlook for 2018.

Our objective is to deliver similar Photonics revenue levels in 2018 compared to 2017 and success here will be driven by capturing increased amounts of funded R&D business. We expect to see another strong year for hard drive business for similar revenues as 2017.

For ENERGi implant systems reason negotiations a little over a weaker go give us confidence that with the three systems already shipped that should begin installation late Q1 and with three more systems to be shipped in the year we will see growth in our revenues from the solar market in 2018.

Given the expected installation timing and dependent upon the acceptance duration, this assumes all six systems will revenue in the back half of the year. For our VERTEX platform, our objective this year is to grow orders, revenue, and backlog on the VERTEX over 2017 levels.

Although, early in the year, our expectation is to book 5 to 10 VERTEX tools in 2018 and we will update you on that range as we progress through the year. With all incremental growth coming from our Thin-film Equipment business, 2018 equipment revenues would increase by at least 15% over 2017.

And our current outlook is for total revenues to grow at least 10%, while increasing net profitability for the year. At this revenue level and expected product mix, we would expect gross profit margins in the range of 36% to 38% with operating expenses of between $40 million to $41 million for the year.

We expect interest income of around $400,000 and income tax expense of around $1 million for the year. As Wendell mentioned in his remarks, quarterly revenue this year will be lumpy and backend loaded with first quarter revenues being the lowest and fourth quarter projected to be the highest.

For Q1 specifically, we are projecting consolidated revenues to be between $17.5 million and $18 million. Based on customer requirements, the Q1 production includes only one 200 Lean versus the two 200 Lean systems that were in revenue in Q4.

And the Q1 projection also includes about $2 million less in hard drive non-system revenue than what we recorded in Q4 2017. Total Photonics revenue in Q1 will be similar to what we recorded in Q4 2017. However, we will have about $1 million more in funded R&D revenue in Q1, 2018 than we had in Q4 2017.

Installation of the three ENERGi systems currently at the customer will occur late in the quarter, so the acceptance in revenue will not occur until after Q1. We do not have a VERTEX system in the Q1 revenue projections at this time since there is a likelihood that the next systems could have a different configuration and require signoff.

Given the lower fuel revenues, which will impact factory utilization and the change in revenue mix in Photonics, we expect first quarter gross margins to be between 29% and 30%.

Q1 operating expenses are expected to be between $10.5 million and $11 million, higher than our normalized level due to higher research and development spending along with some typical seasonal increases. We expect interest income of about $50,000 and net taxes of about $200,000 in the quarter.

For Q1, we are projecting a net loss in the range of $0.22 to $0.26 per share based on an estimate of 22 million shares. This completes the formal part of our presentation. Claire, we are ready for questions..

[Operator Instructions] Our first question comes from Nehal Chokshi with Maxim Group. Your line is now open..

Thank you. And congratulations on announcing that a top five cell phone application of adopter oDLC coating. That's really huge I think.

Just to be clear, when you say it tops five cell phone applications, are you taking about in terms at particular SKU, is the top five selling or you talking about a top five OEM?.

It's top five OEM..

Okay.

And presumably this is just one of many SKUs that they are basically testing this feature and their product in the market in terms of market response?.

Yes, just looking at their - the plans that at least that we're privy to. They're going to ramp it up gradually through the first quarter, and it's our understanding it would be on one particular model just initially, and then would go from there..

And presumably this will be relatively high-end SKU as well, right?.

I probably shouldn't even - like we said in the prepared remarks, it's really not our place, but I'm very hopeful that there will be more press on this as we move out in the quarter..

Okay. Very good. I'll get back in the queue here. That's my initial question. Thank you..

Thanks..

Our next question comes from Craig Ellis of B. Riley FBR. Your line is now open..

Hi. This is actually Peter Peng calling in for Craig Ellis. Thanks for taking my question..

Hi, Peter..

On the Lean System, can you just talk about your customers and where they are at in terms of the technology upgrade and how much of their capacity is upgraded and how much further?.

Well, we've got several programs going on. I think that what we've seen is strength on the process module side that kind of drove some of the results in 2017 and we're seeing decent visibility moving into 2018 there. From the processing technology side, there is just a lot of different things that we're doing there.

And on the equipment side, it's about - that was fundamentally a three-year program that was started around mid-2016, mid-late 2016, so we're moving through that as we go through 2018 as well..

Okay.

And on the solar systems, beyond that 12 ENERGi system, are you expecting any more orders? Was it just a new system that you're going to be seeing this year?.

I think when we look at the ENERGi's those of course in backlog, I mentioned in the prepared remarks, we have ongoing dialogue with the current customer. But I would assume that any activity in that area beyond the ENERGi would be somewhat of a new configuration that would have to ship and signoff.

So I think those opportunities are probably on a revenue event basis outside the year..

Okay.

On your kind of your advanced packaging initiatives, can you kind of talk about the size of the opportunity and when do you expect Q2 revenue, and is it just you're talking about, are you talking about some of the front-end manufacturers as well?.

Our product development process requires us to move out of gate to have what we'd consider to be a Tier I target customer. So we've been working with the OSATs over the last year. Kind of the genesis of it is that as they look for cost reduction they look to migrate to bigger formats from wafers to panel level processing.

There was a lot of work done to say is front-end 300 millimeter semiconductor tool is the right platforms.

And there was initiatives to look into the solar industry and to some other industries this type of technology that runs in a different mode was designed at and not necessarily to do to follow those Moore's Law, but to have excellent particle performance, super high throughput, and it kind of leans you to some of the solar tools, and that's really where we started our activity and dialogue was based on that.

As far as opportunity, what I said in the remarks is that because our tool, the MATRIX uses a carrier to run through it. It's the identical tool if you don't want to run 300-millimeter tools through it or big panels through it.

There's no change it needs to be made, so it's providing an upgrade path for anybody that's doing 300 millimeters that wants to transition to panel, and also we're talking to people that just want to make their move to panel now.

But I think when we look at the panel level projections at this point, it's still in its early stages and that's why we wanted to be on the front-end of this. When we look at total number of projected redistribution layer passes over the next five or six years, that actually tend to be conservative.

It would take a couple hundred million of our tools if we were to get all that business.

So it's an emerging business for us, but it was a very logical extension of the work that we have done on MATRIX and proving out that tool platform and basically a barrier and copper seed deposition that we did in the solar market which is completely and absolutely applicable to this advanced packaging market..

Okay. Great. And then moving on to Photonics, you guided for a kind of a flattish year-on-year growth, but if I look at last year, revenues were between $8 million to $9 million a quarter, and now it's tracking $6 million to $7 million.

What made you comfortable that the back half is going to pick up significantly?.

Most of the ramp in the back half in our revenue profile is fundamentally based on the equipment, not so much the Photonics. We see that running at a relatively stable run rate. And I'll let Jim comment..

Yes. But specifically to the Photonics a couple of things that I'll just point out if you can remember. We have more product revenue in the first half certainly in the first three quarters of 2017, and in the fourth quarter of 2017, we didn't have as much product revenue.

And so as both Wendell and I have been saying in the last couple quarters and we mentioned again in our prepared remarks today, you're seeing the business in Photonics go to more of a funded R&D, and although, we expect a similar amount of revenue in Photonics in Q1 that we saw in Q4.

Based on the order profile that we're projecting, we would expect the second half to pick up. As Wendell said, it's really going to require us to be very diligent and vigilant on securing those bookings to allow that back half revenue in Photonics to pick up..

Okay.

Can you just talk about your cash positions and how you're comfortable with, I guess with all these initiatives going on, where would you be comfortable with in terms of your cash?.

So as we said, we ended the year with just under $44 million of cash and no debt. And as we look into 2018, we expect to get cash flow positive throughout the year, even despite some of the investments on the initiatives because if you look at last year, we spent quite a bit of money in R&D as well.

And with orders, we will continue on the equipment side of the business to get down payments on those orders. So we're comfortable that we have more than enough cash and we'll continue to manage our cash well in 2018..

Great. That's all I have. Thanks guys..

Thank you..

Thanks Peter..

And your next question comes from Ben Klieve with Noble Capital Markets. Your line is now open..

Thank you.

First, going up on the last question about the R&D versus equipment sales on Photonics side, given the kind of uncertainty on Washington here, are you expecting a flat to R&D run rates throughout the year? Or do you think that that if you get a bit of visibility that there could be a ramping on the R&D side in addition to what it sounds like do you expect a ramping on the equipment side?.

Yes. I think on the Photonic side as we go into the year, there is a lot of unfunded requirements throughout the budget, and there's been some sequestering and reduction of budgets and some line items being struck.

It's our understanding that once we get through this grid lock, some of those requirements will be refund into the budget, but we've got to get through where we're at now in some of those programs that can provide R&D funded growth in the back half of the year need budget approval.

As I talked about the no new starts and things like that that we're currently on in continuing resolution. So we just got to stay on top of it..

Okay.

And then the three ENERGi systems that are expected to ship still later this year, I'm curious that the commitments you have from that, do you have any idea if your customer is still working through the dynamics that have delayed the shipments of the other six as a variable that could impact the shipment of those three, or do you think right now they have the capacity and the ability to take on those three and it's just a matter of waiting for the delivery? I mean are there variables that you think could push back those three still or do you think that's pretty firm at this point?.

We haven't finished the final negotiation. We were there week and a half ago. We certainly can see that the factory that was basically halted is back and moving. We are aware that there was some additional funding that was announced publicly that was going into that facility. So we believe from where we stood say mid December to where we stand now.

There's been significant movement. We talked to some of the other suppliers to see what they're hearing as well. So right now it looks like the planning would be for those tools to move out maybe sometime in July. So they need to install the first three get that part of their line up and then they take the next wave that's kind of the current plan.

So I think from where we were in December, where there really was not a clear plan for us and we were trying to work through it to where we now, we've now got scheduled plans and discussions going. I think we're in much better shape there.

Until it's done, it's never done, but we also have cancellation clauses in down payments and things like that to protect ourselves on those type of activities. But right now like I said, much clearer than where we were four weeks ago, and we see some movement forward..

Perfect, very good. All right, thank you very much. I'll jump back in queue..

Thanks..

[Operator Instructions] And we have a follow-up question from Nehal Chokshi with Maxim Group. Your line is now open..

Thanks, couple of follow-up questions.

One is that, would you consider a buyback considering the stock prices and I would have agree with it in terms of that you have more enough cash on the balance sheet?.

That's something that we talk about in our board activity. It's always something that is considered as what is the right allocation for capital. But we always also want to keep in mind that we did do a buyback about $30 million just shy of $30 million.

And as we're looking at some of these new initiatives that we're engaged and we're also looking at is there acquisitions tuck-ins that we can do that could really amplify or accelerate those activities. So we keep all that in balance, but that's one of the things that we definitely discuss..

When was the last time that board discussion was had?.

Well, I think it's discussed in every board meeting to some extent. Looking at where our stock prices are. Our programs are. Where our different opportunities maybe and that's always one of the things to consider..

Okay. So let drill a little bit deeper into the VERTEX expectation for calendar 2018 5 to 10 tools.

Now when you talk about 5 to 10 tools, the baseline of 5 tools, is there a definite 5 tools that you're tracking or is it a combination of multiple different opportunities that in aggregate when you add up those probabilities, you're looking at normally 5 tools?.

When we range like that, we're looking at. Projects that we had and what it would take to put the capacity and make that happen. What's going on with different programs with truly we has that installed capacity and how their capacity is being utilized? And then we look at the timing of when all that would rollout.

So that kind of puts us in that 5 to 10 range. So it's not - it's more focused at specific projects that we're working on with different customers and what it would take to provide enough capacity to at least launch..

Okay and there is major - the top five cell phone OEM, what's the probability that you would put on them actually going forward with going ahead and thing, yes we are seeing a positive market response and therefore we are going to ramp it into more skews and therefore we're going to need truly or another ODM to increase our capacity..

That's a tough question. What I can say is that the difference with the coatings on the outside and coatings on the inside is very, very evident and striking. And I think that if it was me buying the phone or if I was in someone else's shoes wanting to cell phones, I would want it on the outside. So I think it's a new feature.

So I think they're going to ease in to some degree. I think they're going to look at market acceptance and it go from there. So it's really hard for me to put a percentage on what that adoption will be, but for my eyes it's 19 day..

Okay, great. Thank you..

Thanks, Nehal..

Thanks, Nehal..

[Operator Instructions] And our next question comes from Mark Miller with Benchmark Company. Your line is now open..

I believe you mentioned during a call that you were expecting minimal n-type cell capacity ads in 2020.

I'm just wondered this was supposed to be a growing area, is it taking a pause here? What's going on with n-type cell manufacturing?.

Now there's a few things going on. I think that certainly we've seen some of the big n-type guys that you can follow publicly in where they're at with their production they've taken some capacity offline certainly they're working on costs.

I think in activities in China, I think that there was a - I think the SunShot program, forgive me if I've got that wrong, top runner or something like that that there was a lot of funding going in on n-type that got diverted to p-type PERC cell rollouts.

But I think now that we're back into 2018 that the activity may resume as far as where some of that government R&D funding for the top runner that programs are set.

And I think that to your question I think it's just been a real focus that to go and upgrade the p-type facilities to the PERC, solar architecture with some type of the aluminum oxide passivation schemes and that's where the focus is..

Are you looking at any opportunity to combine your DLC coating with another same anti-reflection coating in the same tool, would that be an opportunity to expand the scale of the market for you?.

The answer to the question is, yes and in my prepared remarks, I talked about the 2.0 version and that's source technology being applicable for anti-reflected films as well as decorative films in the future for us off of the VERTEX or very similar VERTEX platform.

There's a little bit difference in how the architecture of that tool would be configured whereas for say anti-reflective coating stack. You want to do multiple interference layers, so you'd want to be able to run by each particular source multiple times, rather than today where the VERTEX just has a single pass-by.

So there's a little more work to do there.

But the source technology itself was initiated and developed to be able to do a number of different types of films and in particular to make very hard films?.

And implications of the higher U.S.

thin-film solar cells are you expecting any reaction too early to tell?.

Well just what I'm reading right now as that the one that we really particular follow would be the n-type guy here in the U.S. who appears to have gotten there in their positioning that to make that stop. So I think that's a bit of uncertainty in particular space..

And finally a housekeeping issue, I see in your release, you're talking about year-end backlog up to $52 million, but I thought you said during the call, the backlog at the end of the summer was $64 million.

What do I missing here?.

The $52 million is equipment only. The $64 million total. Photonics was $12.3 million..

Okay, I see it. Thank you..

At this time I'm showing further questions. I would now turn the call back over to Mr. Blonigan..

Thank you. Before I sign-off, I'd like to thank the dedicated employees of Intevac, all around the world for their tremendous effort and successful outcomes in this dynamic environment. I also want to thank our customers for their continued business and appreciated partnerships.

I thank all of you for joining us today and we look forward to updating you again during our Q1 call in April, until then so long..

This concludes today's teleconference. You may now disconnect..